Why German Fears of a Housing Bubble Are Overdone

No matter what our views on the European Union, we like to pretend in Britain that we are different from our continental neighbours. This certainly includes a belief that our housing market is somehow unique whether it is our attachment of owning our own homes or our concerns about rising prices and the dangers of a housing bubble.

No matter what our views on the European Union, we like to pretend in Britain that we are different from our continental neighbours. This certainly includes a belief that our housing market is somehow unique whether it is our attachment of owning our own homes or our concerns about rising prices and the dangers of a housing bubble.

It is, of course, simply not true. In terms of home ownership, the UK is not at the top but towards the bottom of the league table of the 28 EU member states.

The culture of home ownership is far stronger, for example, in Romania (96.6 %), Lithuania (92.3%), Spain (82.7%) and Greece (75.9%) than in the UK where it languishes at just under 68%. In fact, only Netherlands, Denmark, France, Austria and Germany - which all have strong tradition of renting - have lower levels.

Nor does this mean that even these countries escape fears about rising prices. The Netherlands took emergency measures three years ago to cap the amount of money that could be lent to take the heat out of its housing market. The ECB earlier this year singled out France, along with Belgium and Finland, as countries where prices were in danger of getting out of control.

In Germany, too, the Bundesbank has been outspoken in warning of the dangers of an over-heating housing market. Property price rises of 10 per cent in some German cities in the last year have alarmed a country where inflation and debt are viewed as twin evils to be avoided.

The response has partly been caused by the fact that such rapid price rises in housing are unusual in Germany. While easy credit stoked extraordinary increases in property prices across much of Europe in the years running up to the 2007 financial crisis, Germany's housing market actually fell.

To the alarm of the Bundesbank, this has reversed in recent years. It has pointed the finger at the record low interest rates across Europe and the cross-border flow of money looking for a safe haven as the main cause of this over-heating. When voting against the latest ECB cut in interest rates this summer, Bundesbank President Jens Weidman justified his decision by again warning of the dangers of a housing bubble. Prices in some cities, we are told, are 25 per cent over-valued.

But not for the first time, those in charge of Germany's economy are being too cautious. The rise in house prices reach a peak 12 months ago and have been steadily slowing throughout 2014.

Viewed, too, against prices in London, German property per square metre remains very cheap. German cities also do not have the influx of the super-rich driving prices for top-end properties in London and the Home Counties which in turns pulls up the entire market.

These pressures do not exist in Germany where, despite the Bundesbank's well-known caution, conditions continue to be benign in the property market. Looked at the long-run against incomes, housing in Germany remains affordable, not something that is the case in the UK. Nor has there been any significant change in volume of mortgage loans on which Germany retains a very conservative approach.

This is good news for all with a direct interest in the German housing market whether home-owners, renters or investors. Prices and yields should continue to rise without the risks of a corrective crash or threats to the well-being of the German economy. Looking at house prices in the UK, this may be one way the two markets are genuinely different.